The January Effect: How to take advantage


The January effect refers to the market’s tendency to rise in January.  Of course, it does not always go up in January, but it tends to be more likely to go up more often or by a larger amount such that the month over long stretches of time tends to outperform.

At an overall market level, the magnitude of difference is rather small, but there are significant differences within the market – certain types of securities can have a much larger January effect.

There are 3 main reasons why the market might rise in January:

  1. Tax loss harvesting gets reinvested
  2. End-of-year bonuses reinvested
  3. Calendar year timing of 401K contributions and ROTH IRA contributions

This year, I think the tax loss harvesting impact is going to be huge.  Here is a Wall Street Journal article discussing the prevalence of tax loss harvesting.

It should be bigger than normal this year because the S&P had such a good year.

These big gains require many tax loss harvesting sales to wash.

Today, I want to focus on how to best catch the rebound as former tax loss sellers pour back into the sold-off stocks.

  • Which stocks have been sold down
  • Which are likely to rebound

Any stock that went down in 2023 could have been a target of tax loss selling late in the year.  In 2023 the main areas of the market that went down were:

  • Dividend stocks
  • Interest rate sensitive stocks
  • Small caps

The capital losses provided by market price losers help to absorb the gains from other stocks.  However, not everything that went down is going to rebound.

The key, in my opinion, to catching the best rebound gains in January is to find the individual stocks that have the greatest contrast between fundamental performance and market price performance.

Many of the stocks that dropped in 2023 were related to companies that were actually suffering.  These are unlikely to bounce back significantly because the intrinsic value dropped along with the price.

Instead, look for those that performed well fundamentally.  Strong fundamental growth coinciding with the price declines which were then exacerbated by tax loss selling has resulted in certain stocks becoming drastically undervalued.

In scouring the market for opportunities of this nature, we have identified 22 stocks fitting this description.  We have distilled the list down to the 3 best and will be posting the full analysis of each on Portfolio Income Solutions to full-tier subscribers. Portfolio Income Solutions, offered through Seeking Alpha’s Marketplace service, provides stock picks, extensive analysis, and data sheets to help enhance the returns of do-it-yourself investors.

I want people to be able to get in on the opportunity so here is a 40% discount to Portfolio Income Solutions, but you can only get it through this link.

Happy holidays and best of luck to you all in 2024!


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